Conglomerate Earnings Per Share: Real and Transitory Growth

Curley, Anthony J.
July 1971
Accounting Review;Jul71, Vol. 46 Issue 3, p519
Academic Journal
The article focuses on conglomerate earnings per share and real and transitory growth. The evolution of complex business organizations has created conceptual and computational problems with respect to earnings per share, and research in this area is currently very active. One major area deserving attention is the reporting of conglomerate earnings per share. When two business entities are merged, earnings per share may appear to grow when, in fact, growth is not enhanced by the combination. This phenomenon, a purely transitory effect, results when the price-earnings multiple of the acquiring firm exceeds that of the acquired firm. This is typically the situation in the case of conglomerate merger activity. The argument rests, however, on two key assumptions. The first is the absence of a synergistic effect whereby scale economies generate a combined earnings stream in excess of the sum of the component earnings streams. The conglomerate, however, operates by acquiring a portfolio of firms from largely unrelated industries, and scale effects probably are minimal. A second and more crucial assumption is constancy of the price-earnings multiple.


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